Good day ladies and gentlemen, and welcome to the Northrop Grumman third quarter 2009 earnings conference call. My name is Lacy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer portion at the conclusion of the presentation. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Paul Gregory, Vice President of Investor Relations. Please proceed, sir.

Paul Gregory

Great, thank you Lacy. Good morning everyone and welcome to Northrop Grumman’s third quarter 2009 conference call. In support of today’s call, we’ve provided supplemental information in the form of a PowerPoint presentation that you can access at www.northropgrumman.com.

Before we start, please understand that the matters discussed today constitute forward-looking statements pursuant to Safe Harbor provisions and Federal Securities Laws. Forward-looking statements involve risks and uncertainties, which are detailed in today’s press release as well as our SEC filings, and may cause actual company results to differ materially.

During today’s call, we’ll discuss third quarter 2009 results and guidance for the year. We will refer to non-GAAP measures, which are defined and reconciled in our earnings release and supporting materials, which are posted on our website. On the call today, are our Chairman and CEO, Ron Sugar; our President and COO, Wes Bush; and our Chief Financial Officer, Jim Palmer.

At this point, please go to slide 3, and I’d like to turn the call over to Ron. Ron.

Ron Sugar

Thanks Paul and good morning everyone and thanks for joining us today. We are very pleased with this quarter’s performance, which was driven by 4% sales growth, a solid 9% segment operating margin rate, strong cash flow, and continued share repurchases. Earnings per share from continuing operations are slightly higher than last year despite our pension headwind.

Adjusting for pension, underlying EPS growth was approximately 22%. As a result of improved operating performance and lower tax rate we are raising our 2009 EPS guidance from a range of $4.65 and $4.90 a share, to $5 to $5.15 a share.

Third quarter new awards were quite strong at $10 billion, or a book-to-bill ratio of 115%. Based on the strength of new awards, our backlog increased to $71.5 billion, which does not include the substantial backlog represented by our many IDIQ awards.

Third quarter cash from operations and free cash flow were also robust, and based on that we continue to execute our balance cash deployment strategy during the quarter. Cash deployment actions included discretionary pension contributions totaling $586 million and share repurchases of $227 million.

During the third quarter we repurchased another 4.7 million shares of our common stock, bringing year-to-date repurchases to nearly 15 million shares. At the end of the third quarter, we had approximately $280 million remaining on the authorization.

I want to spend a moment on sales, which grew by more than 4% in the quarter and for the year-to-date by more than 5%. These trends continue to reinforce our confidence in the strength of our program portfolio, and our strategic alignment with our customers needs. We continue to see solid market demand in areas like unmanned aircraft, C4ISR, the F-35 program, Cyber Warfare, restricted programs and logistics and sustainment programs.

One of the best examples of the strength in our C4ISR positioning is our Battlefield Airborne Communications Node or BACN capability for the air force. This new revolutionary data gateway was created, demonstrated and fielded as a rapid response to challenges faced by the war fighter Insider.

The BACN capability will be integrated on to our Global Hawk platform to provide around the clock critical communications capability to our troops on the ground. Insider commanders in Afghanistan and Iraq have identified BACN as an urgent operational need. This is a game changing technology for our war fighters and we are working closely with the air force to rapidly deploy this capability as quickly as possible.

As I mentioned earlier, third quarter new business awards totaled about $10 billion and included a contract for the refueling and overhaul of CVN71, the USS Theodore Roosevelt. This contract is valued up to $2.4 billion. We were awarded $300 million for continued development of the army’s distributed common ground system and $150 million for lightening, targeting and sensor systems.

Year-to-date, we booked more than $24 billion in new awards. We also won several significant ID/IQ awards that were substantiables in dollar and strategic importance, but won’t show up in the backlogs until individual task orders are received. For example, the air force rays the ceiling of our ID/IQ contract for B-2 modernization and sustainment activities by more than $3 billion. The army selected us to supply Lightweight Laser Designator Rangefinders under a five year ID/IQ contract with an estimated value of $600 million.

We also received an ID/IQ contract from the army for laser and target locator modules. This award has an estimated value of $400 million over five years if all the contract options are exercised. And just after the close of the third quarter, we won the competition to provide contract logistic support for the air forces fleet of KC-10 Extender refueling tanker aircraft. The capture of this nine year ID/IQ contract with a $3.8 billion ceiling further solidifies Northrop Grumman’s position as a premier provider of air mobility solutions.

We also have near term competitively of opportunities upcoming like the Navy’s Consolidated Afloat Network and Enterprise system or CANES, the air force’s GPS OCX contract and of course the aerial refueling tanker. As you know, the air force released the draft RFP last month. Our team is evaluating the RFP and we are in the process of providing our comments to the customer.

Looking ahead, the fiscal 2010 appropriations contracts, the conference is well underway, the quadrennial defense review of QDR is progressing, and the 2011 budget process has also begun. I believe our portfolio will continue to be positively aligned with national security needs.

So in summary. At Northrop Grumman, we continue to focus on managing risk improving operating performance and position the company for growth. We just completed a strong quarter which allowed us to raise our 2009 EPS guidance.

Our balance sheet is solid. We have an exceptionally strong management team in place. We have a program portfolio correctly aligned with future defense needs and as we drive operating margin improvements, we have the opportunity to create substantial future shareholder value.

Finally, in on a personal note as all of you know, I will be retiring as Northrop’s Chairman and CEO at the end of this year, so this will be my final conference call. It has been a privilege to leave this remarkable company since 2003, and I’ve thoroughly enjoyed my interactions with each of you and the investment community along the way. Wes Bush will take the reigns of Northrop in January and there is no one more capable or fully prepared to do so. I expect this company will reach new heights under his able leadership.

So with that Wes, now over to you.

Wes Bush

Thank you very much Ron. Good morning everyone, my comments today will briefly touch on the operational highlights for the five businesses. Beginning with aerospace systems on slide four, we had a particularly strong quarter with 5% sales growth and 10.5% margin rate.

Year-to-date sales and operating margin are on track with our expectations. Growth continues to be driven by restricted programs, unmanned aircraft systems like Global Hawk, BAMS the Navy UCAS and manned aircraft programs like the E-2D Advanced Hawkeye, B-2 and the EA-18G.

Aerospace highlights during the quarter included the launch of two Northrop Grumman build demonstrator satellite for the Missile Defense Agency, space tracking and surveillance system. These satellites will demonstrate the inherent advantages space sensor ranked persistent missile tracking and engagement.

This quarter we also concluded a serious of test that validated the design and structural integrity of the X-47B Navy UCAS. The test confirmed that X-47B meets the Navy’s requirements for a jet powered fighter sized aircraft to demonstrate carrier-based autonomous launches and recoveries. This is a major milestone in preparation for first flight later this year.

Aerospace systems ended the quarter with a $25 billion total backlog, about the same as the end of the second quarter. New business in the quarter included, low rate initial production awards for the F-35 and Global Hawk. New awards for restricted programs, and several follow on awards for space and manned aircraft programs.

On slide five, electronic system sales grew by 2%. You’ll recall the last quarter; we indicated their double digit growth phase would not continue in the third and fourth quarters. So this quarter sales growth is on track with our expectations. This quarter’s lower operating income and rate reflects the $40 million patent infringement settlement we had in the third quarter of 2008 and lower performance for government systems programs this quarter.

Electronic systems remains on track to achieve a mid to high 12% margin rate for 2009. Ron mentioned some of the electronic systems third quarter program awards and at the end of the third quarter, ES had a total backlog of nearly $11 billion. Information systems on slide six had a solid quarter. Sales increased 4%, operating income increased by 32% and operating margin rate improved to 8.2%.

Sales growth for information systems continues to be driven by growth in our intelligence and defense businesses. On a combined basis, intelligence and defense grew by approximately 7% this quarter and are up by more than 10% year-to-date.

During the quarter our cyber security team is awarded the army information operation contract at Fort Belvoir, Virginia to provide secure and efficient network operations and to share information superiority. This contract has a ceiling of $430 million. We have also won five companies, the army selected to provide automatic identification technology hardware, software and engineering services. This contract has a maximum value of $419 million. Information systems total backlogs totaled more than $10 billion at the end of the third quarter.

In our state and local business, we’ve made progress on the Beta program and we are on our way of putting the program back on track. In the third quarter we provided a corrective action plan to the commonwealth of Virginia. We’re working to that plan. For example, more than 80% of the transformation activity and more than 90% of contract milestones are now complete.

In addition, we’ve instituted a number of improved processes for open and frequent communication between the partners. Northrop Grumman, VITA and the various agencies of the commonwealth to ensure rapid and effective resolution of issues. Our plan cost for completion of transformation activities by June 30 of 2010. We are confident that the corrective action plan is the path to success.

Moving to ship building on slide seven sales increased 14% and operating margin declined 4% representing an operating margin rate of 6.8% for the quarter. Last quarter I outlined the components of the performance improvement plan that we’re implementing on the gulf coast.

We are making progress in the implementation of the plan and while we still have work in front of us to fully implement it. We believe this approach will drive consistent sustained improvement on these large multiyear programs. Margin improvement in shipbuilding remained one of our largest opportunities to create value.

Third quarter operating highlights in shipbuilding included the redelivery of CBN-70, the USS Carl Vinson after a successful three and a half year refueling a complex overhaul. We delivered two ships out of the gulf coast the DDG-105 or Dewey and the LPD-21, the New York.

And our second national security cutter the Waesche successfully completed acceptance trials in October, marking the final test before delivery in November. And at the end of the quarter, shipbuilding’s backlog stood at more than $21billion. So all in all it was a pretty solid quarter for shipbuilding was stable performance.

Moving to slide eight, technical services had another strong quarter. Sales increased 4% and operating income increased 5%. However, as Ron mentioned the real highlight for technical services occurred just after the quarter ended when it was announced that we’ve won the KC-10 contractor logistics support program.

Coming on the heels of key A-10 and C-20 wins, this nine year $3.8 billion KC-10 competitive win demonstrates our progress in expanding our presence in the key logistics and sustainment market. We’re very proud of the technical services team and their success in capturing and executing new business.

In summary, we remain intensely focused on managing risk, improving performance and driving growth. This quarter’s solid performance demonstrates that we’re making progress on all three fronts. And with that, I will turn the call over to Jim.

Jim Palmer

Thanks, Wes. Good morning ladies and gentlemen. My comments begin on slide nine and we will focus on third quarter performance, the expectations for the rest of 2009 and some thoughts on value creation on a go-forward basis.

Overall, it was a good solid quarter with mid single digit sales growth, and a 9% segment operating margin rate. Although, not at our long term objective we view this rate as satisfactory at this point considering where we are in the improvement program at shipbuilding that Wes outlined.

Earning per share of $1.52 were slightly higher than last year despite the negative year-over-year pension impact and quite a bit better than what you may have been expecting based on a consensus. The third quarter did include a $75 million tax benefit which improved earnings by $0.23 per share. Before that, our earning per share would be $1.29, a very strong performance considering the pension headwind we faced in the quarter.

Net pension cost reduced third quarter EPS by $0.15 per share compared to a benefit of $0.13 in last year’s third quarter. So on a pension adjusted basis, our third quarter earnings per share increased by 22%.

Based on year-to-date results, we are raising our EPS guidance to a range of $5 to $5.15 from the prior guidance range of 465 to 490. The reduction in third quarter segment operating income to 9% from 9.2% last year is principally due to the lower operating income for electronics, and the primary driver for lower electronics margin was the $40 million of royalty income associated with the patent infringement settlement that occurred in last year’s third quarter. We generally had solid or expected performance in the four other businesses.

There are also some items below the segment operating income line that are worth noting. Unallocated expenses increased by $35 million and that increase principally relates to higher environmental accruals. This reduction was essentially offset by $41 million in other income.

Now, other income typically includes a number of reoccurring items such as interest gain or loss on assets sold reoccurring royalties and returns on assets held to fund our nonqualified plans, in excess of the nonqualified plan expense. However, for the third quarter the largest item in other income relates to a gain of $18 million from a operating joint venture whose performance improved resulting in a recovery of a loan that we had previously reserved for.

Turning to slide 10. Third quarter 2009 cash performance was strong; through the nine months before discretionary pension contributions we generated $1.8 billion in cash from operations and $1.3 billion in free cash flow which keeps us on track for our guidance for the year.

On a year-to-date basis both cash provided by operations in free cash flow are slightly lower than in 2008, which principally reflects higher working capital needs as you all remember, we just had an outstanding working capital performance last year so that really is the change in the working capital.

Year-to-date we have made discretionary pension contributions of $800 million which has turned out to be a very strategic use of capital. Through the end of the third quarter investment returns in our pension plans are about 13%. And at this point, I don’t anticipate any more discretionary contributions this year.

Now I know all of you are anxious for 2010 guidance regarding the financial accounting or FAS and cost accounting CAS pension expense. But as you know, we really won’t have fidelity on this until the books are closed at the end of the year, and that the 2010 cost will be based on actual plan returns for 2009.

The discount rate as of the end of the year as well as demographic and other assumptions. However, to help you think about trends for next year, our FAS expense sensitivities are about $35 million for every 100 basis point change above or below the 8.5% long term expected investment rate return. And then $75 million for every 25 basis points change in the discount rate.

And based on what I see today, our pension position is relatively strong going into 2010, but it is too early to quantify our net FAS/CAS pension adjustment with any degree of certainty. At this point, it does look like investment returns relative to assumptions will be positive, however the discount rate could turn out to be a major driver for 2010 FAS expense for everyone with large pension liabilities. But, again, I believe our relative position is quite good.

As you know, we’ve been very focused on managing our pension liabilities, I’m especially mindful of the potential growth in required funding that may occur in future years due to the magnitude of planned losses in 2008. Our goal in voluntary contributions is to reduce that volatility of those future funding requirements that would otherwise be associated with our plans and to better match the reimbursement for pension cost under our contracts over a multi year basis to our funding requirements. All done in a tax efficient manner while improving our cost competitiveness.

So, even though the vast majority of our pension expense is recoverable through our contracts, we are striving to be as competitive as possible in an environment where the customer is becoming increasingly price sensitive.

In addition to make in pension contributions we used cash to purchase four point million shares for approximately 227 million which leaves us, as Ron mentioned with about 280 million remaining in our current authorization. Year-to-date we bought about 15 million shares and since the beginning of 2007 we reduced our shares outstanding by about 9%.

Turning to the quarter or doing the quarter, we also took advantage of favorable conditions in the corporate debt market and raised $850 million of long-term debt and we used about $400 million of that on October 15 to retire the 8% senior notes that matured at that point. So, in summary a good solid quarter. One in which we continue to focus on proactively managing risk and improving performance.

Looking ahead, as you know we’ll provide specific 2010 guidance on our year end earnings call as our customary practice, but I do want to make the point today that we have substantial opportunity to create shareholder value. Even in a constrained budget environment where top line growth will likely slow we have a tremendous opportunity to improve profitability principally in ship building and in parts of our information systems business.

Relative to our peers we should be in a good position regarding the net pension cost. We continue to expect that we will generate robust cash flows that should allow us to effectively manage our liabilities, fund share repurchases, increase the dividend and invest in the business. So, Paul, with that I think we are ready to turn it over for questions and answers.

Paul Gregory

Terrific. Lacy, if we could go to the Q-and-A session, that would be great.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Sam Pearlstein with Wells Fargo.

Sam Pearlstein - Wells Fargo

Good morning. I guess the first question; I just want to confirm you didn’t mention anything about revenue or cash flow guidance for this year. I just wanted to make sure that has changed on that front.

Jim Palmer

Yes Sam, on cash flow nothing has changed. As I said, I think Ron tracked for that. In terms of revenue, at this point I’d probably be looking maybe at 34.9 versus 34.5, and in terms of how that might be reflected in the segments, I would think aerospace at this point is on the top end of the range, maybe even $100 million better.

Electronics is probably in mid range in terms of the guidance, information systems is probably on the low end, shipbuilding is probably on the high end, maybe even a little bit better and technical services I would say is in the mid range.

Sam Pearlstein - Wells Fargo

Okay, and then can you just talk specifically about electronic systems, just if I look at Q2 to Q3, you had a sequential down tick in terms of sales and pretty I guess big change in terms of margin. I don’t know, is that some benefits that you had in Q2 or is there something else in terms of the mix in Q3?

Ron Sugar

In terms of sales, it really is just the timing of contracts and revenue recognition. As you might remember in electronics, that is the part of our business that has the majority or a large percentage of contracts that are accounted for on a units of delivery basis, and we traditionally find in the third quarter lower deliveries in that business. So that is one of the revenue impacts.

In terms of margins, it really comes down to individual programs. As Wes mentioned we did, as our normal practice look at EACs on a number of our major programs. We did have one program that had some cost growth, and so we’ve also decided to add some additional time to the implementation systems for the system, so we reflected that in our cost assumption and adjusted earnings on that.

Now, I think that part of those costs should be recovered from our customer, but since we are on the very front end of those kind of conversations, we reflected the cost in our assumptions, but we haven’t reflected any recovery in our EAC assumptions.

Sam Pearlstein - Wells Fargo

How big is that cost?

Ron Sugar

We don’t really talk about individual programs, but essentially as we said in the press release, again, on a year-over-year basis, the largest change in electronics was the one time royalty payment that we had last year. When you adjust for that, you had 11.7% margins this year versus kind of 12.4 last year, and I’m not really that significant I think in the overall margin trend.

Jim Palmer

Ron, I think you were continuing to support the projection for electronics for the year in the mid to high 12%.

Ron Sugar

And on a year-to-date basis in terms of earnings this year versus last year, the margin rate in electronics, again adjusting for the one-time royalties that we’re in last year is exactly right on top of each other at 12.4%.

Sam Pearlstein - Wells Fargo

Okay, thank you.

Operator

And our next question will come from the line of Doug Harned with Sanford Bernstein; please proceed.

Doug Harned - Sanford Bernstein

Good morning. I’m interested in ship building. My understanding has been in the gulf, that you’re basically adding to the management team, you have been bringing people over from Newport News, and also putting operational metrics in place that perhaps are more rigorous than where they are before. Could you talk about how that process is proceeding where you stand now, and when you think you will be where you want to be in terms of having that organization and the management processes all set?

Wes Bush

Yes Doug, it’s Wes, let me kind of take you through that a little bit, and if you reflect back on some of my comments from the last quarterly call, I would say things are on track relative to what I delineated then, but if you would kind of turned the clock back a little bit it was the beginning of last year, the beginning of 2008 we announced that we were going to be integrating the two previously separate ship building businesses into our new ship building sector, with Mike Petters as our Sector President.

Mike and his team went through a very thorough organizational process last year, during the year 2008, to identify the right organizational structure and then the right people to populate the structure. It did include moving select individuals from Newport News down to the gulf to take some of the key positions. It also included identifying many of the very, very capable leaders that we already had in the gulf for important positions in the new organizational structure.

We largely went through that process last year, and at the end of the year if you look back on the senior leadership positions, about three quarters of the senior leaders were in different roles. So that was really our focus last year, making sure we had the right people in the right roles, and we continue of course as in any business we continue to fine tune that, but I feel good about the leadership profile in the Gulf coast operations.

Getting that leadership team in place was critical, because as we have worked to define and now implement the new operating system with what you mentioned the metrics, but as or perhaps more importantly, a different focus on how we are actually managing the progress of construction.

We wanted ownership, we didn’t want this just to be something that was invented at some senior level, and then new folks brought in trying to figure out if they could implement. Instead, we used the team that we have worked to establish last year, to together design and build this operating system, and really began I would say, the aggressive implementation of that operating system over the course of this year.

As we did that, it reflected in changing the profiles for how we were getting ships done, we talked a little bit about that last quarter that those changes rippled through the schedules and costs and that showed up in our earnings in the first two quarters. That operating system, I went through it in some detail on the call last quarter in terms of the work that we’re doing with phase implementation plans or we are breaking things down in the finer gated decision blocks for each of the ships.

It is taking hold and I would say that even though we are very early in the implementation of a very substantial change to the way we’re driving the operations. So far, the results indicate that it’s doing what we intended. The nice thing, the better thing I would say about this approach to running the business there is it really gives us earlier visibility of cost and schedule variations, and that gives us time to get out in front of those things when inevitable execution issues arise.

I think the most important thing is the rigid adherence to this billed sequence that we defined in the Gulf, really drives problem resolution to the left in the process, instead of lighting things slip to the right and in aggregate and become bigger problems downstream. We’re also adhering to the class build plans that I talked a little bit about last quarter, and we are beginning to see that they really should drive substantial benefits and zero production.

So I would give us the grade of in process right now. As we’ve been indicating now for some time, we need to get some runtime on this operating system, we need to iron out the bugs that inevitably arise, as you better connect the planning process with the program execution process, with the labor management process, all those different processes operating together in a system takes a little bit of time to wring that out, and it’s my expectations as we get into the early part of next year, we’ll be able to really give you some indication of the stability of what we have been able to accomplish for the operating system.

So that might have been more of an answer than you wanted, but I thought it was important to take you through it since we are doing a lot of work down there.

Doug Harned - Sanford Bernstein

No, that’s helpful and as the follow up, on the state of Virginia you talked about going to June 30, 2010 now as the target for this transition date. Now let’s say that happens; will you be able to basically work through that point, go into operation and feel that you’re not going to have to take a charge given that you essentially add the year to the entire development period for this.

Jim Palmer

Doug let me walk through wider a little bit, and as you know these large IT outsourcing programs such as VITA are essentially characterized by two types of risk. The first is the cost of transition from the old legacy competing environment to the new environment, and then once you have completed that transition, it’s the future revenue stream and the cost to provide that future revenue stream. And at this point in time the cost associated with the transition are being deferred, and then amortized against both current and future revenue streams.

So at this point as Wes said in his comments, we’re about 80% complete with the transition, so a big part of it is behind us. We do have some agencies to complete, that will take us into a kind of mid next year, but we have made substantial progress on transition. We’ve been working diligently not only to complete the transition, but also to drive down the cost of providing the services that we performed currently, as well as in the future.

We’ve made good progress on both of those, and for certain we do have to complete the transition, but at this point from my perspective, I see the largest variable in this equation to be the future net revenue stream, particularly in a budget constrainted economic environment as we are now experiencing. The key will be whether that future net revenue stream was sufficient to fully offset the unamortized transition cost, which frankly at this point, I think is probably at the high point.

Clearly, we have some more cost to incur on transition, but we will also have some amortization, so I’m really looking at this point kind of in the water mark in terms of those unamortized cost, and so the key role, as I said that future revenue stream and whether it’s sufficient to allow us to recover those unamortized cost, and if it’s not, we could have some impairment of that unamortized costs, but the good news if you will, is that it’s a non cash item at that point.

Doug Harned - Sanford Bernstein

You want to add much visibility into that it sounds like, until you get well into next year.

Jim Palmer

Well we clearly have a future revenue projection and a cost projection, and it’s based on what we see as the requirements and the need, based on the two years that we’ve been already providing services, but I think any of us in our own businesses only have to look at what happens to the appetite for IT services overtime.

They tend to grow as apposed to shrink and so the key will be as I said, that future revenue stream in total over the remaining seven, eight years of the program. At this point, we feel pretty good about our forecast for future revenues and future costs, but it is as I said a variable.

Operator

And our next question will come from the line of Myles Walton with Oppenheimer & Company

Myles Walton - Oppenheimer & Company

Hi, thanks and good morning. Ron it’s been a pleasure working with you in the last couple of few years, five years now. Wes, you are getting handed to the keys just as a spending cycle is kind of running on a gas, there is few ways you can mange a business in a constraint or maybe even declining revenue environment on the future.

I’m curious, as you look out, do you anticipate shifting the company in terms of the way you will manage Northrop, whether that’s through acquisition, the best strategy, overall capital deployment or just your thoughts if there it will be a change and kind of where on the margin you anticipate that happening?

Wes Bush

Yes, thanks Myles. When we look at the environment, clearly at the national level there are different pressures today than there have been over the last few years. On the flip side of that, we all know national security spending is more responsive to what’s going in the world around us necessarily as to individual annual budget cycles and so we continue to see a lot of issues.

In a broad sense when you think about global security, that the nation is simply going to have to address, and we’ve architected this company to be in an absolutely stellar position I believe, to address that global security challenges and more simply need to navigate our way through the budget issues over the next few years as we continue to expand our way of thinking about addressing those global security challenges.

This is a great company. It has just a tremendous side of capabilities and I gave first Ron an enormous amount of credit for what he has done in assembling the capability that we have today. So I’m excited about the future, and now it’s not the time I would choose to go into lots of thoughts about all of the things that might be on our mind for the future, but I would that we believe we’re incredibly well positioned and it’s really up to us to take advantage of what we have in the corporation to fully address the emerging environment that we see in front of us.

Myles Walton - Oppenheimer & Company

And Jim, I guess on the 2010 outlook, I know you don’t want to talk too much about it, but given the moving parts in the portfolio, would you expect sales growth in ‘10 to be above or below what you are seeing in ‘09?

John Palmer

Myles, I’m going to wait till January, as is our traditional plan on guidance. We’ll just leave it at that.

Myles Walton - Oppenheimer & Company

All right, John.

Operator

And our next question will come from the line of George Shapiro with Access 342. Please proceed.

John Palmer

Hello George.

George Shapiro - Access 342

How are you doing Jim? Lots of luck to you Ron after all these years, and good luck to you Wes.

John Palmer

Thanks George.

Wes Bush

Thanks George.

George Shapiro - Access 342

In shipbuilding, you said that you might be a little bit above the high end, but the reality is even if you did 59, you see a substantial drop in shipbuilding revenues in the fourth quarter, and usually the fourth quarter is your strongest revenue quarter. So could you kind of explain what’s going on there, or are you really going to be very conservative in terms of what sales are going to be?

Jim Palmer

Yes George, the variable always in these big contracts is the cost input at the end of the year. As you know we use percentage of completion; it’s based on cost, and so how much cost are you going to get from various suppliers is a key in determining the revenue forecast, so that’s the big variable at this point in time.

We have a good handle obviously on how much labor we think we’re going to expand, but the variable is always that cost input from the supply community, and I wish it were easier to forecast than it is.

George Shapiro - Access 342

But Jim, as you go back to like the last three or four years, the fourth quarter revenues have been traditionally the highest of the year. So I was just wondering what in the mix of business might be substantially different this year that would cause this year’s fourth quarter to be a lot less than the highest of the year.

Jim Palmer

George it really is just that cost input that as I said it occurs in the quarter, and when I look at the fourth quarter, you are right, this quarter is above that forecast, but the fourth quarter for example is above the first quarter. So there are quarterly variations in the revenue dependent upon that cost input, variability that goes with the various programs.

George Shapiro - Access 342

Okay, and then one quick follow up; have you seen any difference in terms of the F-35 sales projection that you are looking at over the next several years?

Wes Bush

No, not from what we can see at this point George. We make our own assessments of that in our long range planning. We obviously take into account what we believe are the budget plans, and also frankly the realities we’ve seen over the years of the inevitable changes in the production quantities and what have you, but we’re not seeing any changes from our planning standpoint.

George Shapiro - Access 342

Okay, thanks very much.

Wes Bush

Thank you, George.

Operator

And your next question will come from the line Joe Campbell with Barclays Capital. Please proceed.

Joe Campbell - Barclays Capital

Hi, good morning and I’d like to echo everybody else’s sentiments. Ron we are going to miss you. Good luck in whatever you choose to do and Wes I don’t know about an MIT guy running a California company, but best of luck.

Jim Palmer

Well I can thank you Joe, he may not.

Joe Campbell - Barclays Capital

I have a kind of bean countered question about cost accounting standard outlook. I know the FAS is pretty volatile with all these discount rates and lots of variable, but what’s the outlook for the way the ability to build the pentagon is going to go under the class of accounting standard, and if you have any update on what it is that the government is doing under the PPA mandated harmonization of CAS and FAS that would be great as well?

Wes Bush

Okay, good questions Joe. On CAS harmonization, well let me backup. First of all PPA is a funding mechanism which really drives how much we have to fund into our plans. It has nothing to do with FAS or CAS.

Joe Campbell - Barclays Capital

Except that there is the PPA mandates, that cost accounting board to harmonize the PPA minimums in CAS?

Wes Bush

So we had essentially as I said three requirements or three regulations, FAS, CAS and funding. You are correct, that there is a move under put to try to harmonize CAS to PPA. It’s unclear exactly what that will mean. I don’t expect that it will mean they will be exactly the same.

The industry saw a draft of proposed CAS harmonization about a year ago. We’ve made some comments to that and we haven’t seen anything since then. So at this point as I said, we saw a draft a year ago. That draft as I said, partly closes the gap between what PPA would require you to fund and what you are reimbursed under your contracts for under cost accounting standards, but it does not entirely close the funding or the difference in funding in CAS.

Exactly where it will end up is kind of anyone’s guess at this point in time, until we again see the next version of the proposed regulations. I do think it’s fair to say George or Joe, that the CAS harmonization should result in an acceleration of the recovery of cost under the cost accounting rules, but again, I don’t expect that it will be fully on top of the funding requirements.

Joe Campbell - Barclays Capital

Okay, and what about what’s going to happen to CAS in say, ‘10, ‘11, ‘12?

Wes Bush

Well a lot of variables, but I think probably the best way to talk about it is to hold all the variables constant. So if I hold investment returns at 8.5%, the discount rate constant all the other assumptions essentially, I’ll talk about what I see for FAS or CAS or the net FAS/CAS difference and then for funding.

If I look at 2010 and ‘11 for example, I would expect that FAS expense stays relatively constant. Some fluctuation around $850 million number, essentially where we are for 2009, but with some fluctuation around that, maybe a $20 million type number. The net number, net FAS/CAS number I think in 2010, under that set of assumptions improves maybe $50 million bucks and improves more in 2011, significantly more and that is without a CAS harmonization assumption.

When I look at my funding going forward, under that set of assumptions, I’m fairly confident that my recoveries under CAS would exceed all of my required funding amounts for 2010 and ‘11 and if I chose to do voluntary contributions, let’s say at the same combined level as I did in 2009, I still ought to be somewhat cash positive from total recoveries versus total funding.

So that’s kind of how I see that landscape at this point in time, but as I said in my prepared comments, there is a whole lot of variables at this point in time, and I only have point to last year, that these calls last year where some of us in the industry were projecting kind of 7.5% discount rate, and when we got the year end and it was back down in their low sixes.

So there can be a lot of variability between now and the end of the year frankly, both in discount rates and potentially in investment returns, although we have had a good market so far this year.

Jim Palmer

But it sounds like under most circumstances your CAS is going to be big enough, so you’ll recover everything you have to put in and CAS is rising, so whatever. When FAS just feels like let’s say staying the same, it could also rise, but in any event, whatever pension shortfalls they are it feels like in your case at least the government will be providing, sounds like all of the funding, and on an improving and accelerated basis without harmonization, and with harmonization it would be even better.

Wes Bush

I think that is a fair assumption.

Jim Palmer

I know what you can’t know what the discount rates are going to be, so terrific thanks very much and good luck to everybody.

Operator

And our next question will come from the line of Howard Rubel with Jefferies. Please proceed.

Wes Bush

Hey Howard

Howard Rubel - Jefferies & Company

Good afternoon gentlemen. You’ve been pretty straight forward with your share repurchase program and you continue to have a fairly conservative balance sheet. Is there an effort here to change the debt to capital ratio, and now that you have completed some of your near term funding requirements on the debt side?

Wes Bush

No, I don’t think so Howard. We are continuing to manage balance cash deployment. What you see is what you get, and these days it’s not a terrible thing to be a little conservative.

Howard Rubel - Jefferies & Company

No, I appreciate that Ron. Then just to follow up a little bit on the conservative side, it appears as if two of the more highlightable contracts that have now been put into the marketplace, the LCS rebid and the tanker, both have fixed price elements to it. Could you explain how you’re going to run the business or operate it, so that the risk isn’t unmanageable?

Ron Sugar

Let me take a first cut and probably more important here is what Wes has to say, but LCS we’re not directly playing in that at the moment. Tanker, obviously on that when we have a competition underway we have an RFP on hand, we are evaluating the draft RFP which has certain conditions in it, and we are in the process of having our discussions with the government, so it would be pretty immature for us to say much about that.

I will say overall though, as we look going forward, we have to be extraordinarily mindful of the risk reward for all contract bids, and if we see conditions and terms that don’t make a lot of sense for us on some future opportunities, we will look at those very carefully before we would actually go bid them or we bid them on conditions we felt would be sensible for our shareholders. I think that’s the way we are approaching it, and frankly I can’t speak for the whole industry, but I’m certain that other folks have similar views.

Wes Bush

Yes Howard, its Wes. I guess the thing I would add, and just to amplify really what Ron was saying, we certainly intend to be very disciplined in our approach to this market place. All of us have lived through the other side of this experience on fixed price contracting and so, some major investments were made, and we hope to learn from those investments if you will.

What I would also though say, and I think it’s important part of the thought process here and as we work to engage with our government customer; I think there is a good understanding or an emerging understanding that fixed price doesn’t really bound or appropriately manage risks for the government in all cases, particularly when you are talking about the development side of things.

When I asked the contractors to fix our pricing, and there is a reasonable expectation of volatility of requirements or of funding profile or other types of external inputs beyond what the contractor can control. The contractor has to price that risk, and he has to price the risk in a more conservative way than the government should be able to price that risk, by managing the risk appropriately on their side.

So my outlook is to the extend that we see the inappropriate use of fixed price activities, spike in development where true development to be done, the government is going to find itself actually paying more to get things done, because I believe as an industry not just Northrop Grumman, I think as an industry we are generally much more disciplined about our approach to pricing risk today than the industry may have been a decade or so ago.

So I think hopefully we will able to gender the discussion with our customers. That really reflects that reality of how risk has to be priced. If they are try and put it all the way over on the shoulders, the contractors who really don’t control the majority of the sources of volatility.

Ron Sugar

And again Howard, I think that this differentiating of fixed price development is a different animal than fixed price production; for something the government we know exactly, out of bill.

Again fixed price production contracting has often turned out to be a win-win, and it’s usually a win-win, particularly with multiyear funding, and we’ve been very pleased with many of our multi year fixed price production contracts. They give us better margins, better predictability. It’s the development that is more problematic.

Howard Rubel - Jefferies & Company

I mean Ron, like F18 is a great example on that end, but I just am concerned that the government doesn’t understand that you don’t repel the law of physics by this thing on it. I mean, the two of you should know that better than anybody.

Ron Sugar

Well again Howard, you run experiments till you show to yourself that it doesn’t work.

Wes Bush

You said it well Howard.

Howard Rubel - Jefferies & Company

All right, thank you.

Operator

And our next question will come from the line of Kai Van Ruhl with Cowan & Company, please proceed.

Kai Van Ruhl - Cowan & Company

Yes, let me share the nice comments for Ron.

Ron Sugar

Thanks Kai.

Kai Van Ruhl - Cowan & Company

Well done. Hey Jim a question. You gave us the sensitivity to cash to the P&L, but what is the sensitivity to the pension benefit obligation of a 25 bid swing approximately?

Ron Sugar

Kai, as I remember, a 25 bids swing on the obligation side on the discount rate is $700 million.

Kai Van Ruhl - Cowan & Company

Okay, which would say that even if the discount rate is down 50, is 50 bips lower, it would look like your total pension benefit under funding at the end of the year given the good performance should be comparable to the end, what you had going into the more or less slightly better discount rates or closer. Is that a fair guess?

Ron Sugar

Yes, I would say today being 9:30, with no change in assumptions and then the actual performance, we essentially cut in half the under funded situation in the plan at that point in time. Now if discount rates move by 25 basis points, as you suggested that affects that funded amount by that roughly $700 million for every 25 basis points.

But I think as I said, given the performance in the plan, as well as our funding situation this year, at the beginning of the year, we had roughly $3.6 billion unfunded situation and at the end of September, that’s probably a little bit under $2 billion. So, really good progress, both from a contribution side, as well an earnings side.

Kai Van Ruhl - Cowan & Company

Right, so to my point in terms of forgetting exactly when you are required to put the money in via Alissa harmonization, you are going to be relative, if you kind of hit your 8.5%, you probably don’t have to continue to fund at the levels you did in 2009, it looks like.

Ron Sugar

My required contributions, under those scenarios that I talked about would Joe, 8.5% no change in discount rates, my required contributions next year at this point are probably a $100 million.

Kai Van Ruhl - Cowan & Company

But forgetting your required, if we think out over four to five years, you’re under funding situation, its really not that bad, because at some point I think everything is (Inaudible). So it’s not like you are having a great big monster there.

Ron Sugar

I agree with you, as you know, in our investor conference, we had a chart in our presentation, which essentially showed that our funded situation was the best of the major peers. I think we’ve only added to that situation as we’ve gone through the year.

Kai Van Ruhl - Cowan & Company

Terrific. Thanks so much.

Operator

And our next question will come from the line of Robert Bengon with Credit Suisse, please proceed.

Robert Bengon - Credit Suisse

Ron, let me echo the comments, congrats on the retirement.

Ron Sugar

Thanks Robert.

Robert Bengon - Credit Suisse

A couple of things; Jim, you talked about segment guidance from a revenue perspective and I think that Wes talked about electronic systems; anything else that you can add for us just going to the final quarter from a margin perspective along the segments?

Jim Palmer

Yes, Rob the best way for me to think about segment operating margin at this point is, I’m nine months into the year. I look at my nine month rate and I think my year end rates are going to be kind of 10 or 20 basis points around, we’ll have that for nine months.

I think it all stays as opportunity to do a little bit better, I think electronics as well, ships I am expecting a 5% margin, but essentially from a individual segment, I would look largely at where I am at today and then I am going to have a little bit of fluctuation around that for each of the segments.

Robert Bengon - Credit Suisse

Okay, and then more specifically couple of things, first of all on the KC-10 sustainment, no one’s protested that at this point.

Ron Sugar

Well, right now we are not aware of any protest. There was one other competitor, we will wait and see as the period expires and deal with that when it comes.

Robert Bengon - Credit Suisse

Okay, and then with the two satellites that you delivered in the quarter, the STSS satellites you talked about earlier, does that present any kind of revenue headwind in the next year in aerospace?

Ron Sugar

Actually this year well it was a fairly low burn rate on those satellites because it was primarily wrapping up for delivery and time spent at the launch site, so no, we really don’t see that as a headwind for us.

Robert Bengon - Credit Suisse

Okay, and then just the last thing on the ship building side, there’s been talk about the submarine program and some issues there on the welds and so forth, where does that stand, and are there forward issues?

Ron Sugar

We really don’t see those as forward issues for us. I give a lot of credit to the New Port News. Whenever there is anything on the quality issue, they jump on it very aggressively and very transparently, a very open engagement with the customer. We are making very good progress on repairing the issues that you have seen reported that had been found.

I don’t see that impairing our ability to meet our delivery commitments and more importantly, I think we feel that the customer is pleased with the aggressive approach that we are taking to both identify and resolve the issues, as well as our approach to continuous improvement to make sure our processes preclude future or currents of similar issues. So I see us making good progress there.

Robert Bengon - Credit Suisse

Okay, and then I guess one last one, Wes or Ron, is there anything coming up in the next quarter or two from an award perspective that you would want us to focus on?

Ron Sugar

Well, I think we did mentioned in my initial remarks. Kanes, OCX are two examples of that. Anything involving refueling tankers is obviously way out, probably into the latter part of the next year, but what is interesting is that while we don’t see that many competitive awards up for grabs in the next couple of quarters, we do have a very, very robust amount of follow on business to existing contracts, and frankly that’s very good business for us, because that’s business we get from performing well.

A good portion of our backlog as you know, probably the overwhelming majority of it for the next year is pretty much already in the $71 billion that we have got now. So nothing else that I can think of off the top of my head if you guys have any other ones. Lots and lots of little ones; literally 1000s of individual awards, but nothing that would kind of rise to a big or shattering opportunity.

Robert Bengon - Credit Suisse

Okay. Well, thanks very much.

Operator

And our next question will come from the line of Joe Nadol with JP Morgan, please proceed.

Joseph Nadol - JP Morgan

Congrats to both of you guys as well from my end, and that’s actually my first question; is during the transition process over the next two and change months, could you give us a view into what you guys are doing differently from last month or two months ago, how are you handling the transition.

Then any thoughts on the sustainability or the duration of the split CEO Chairman role? Is this like a one year thing? is that the anticipation here or is it undetermined?

Ron Sugar

Well Joe, one thing that I think is pretty evident is that we take management succession very seriously here at Northrop. We have been involved in this for quite a number of years and the board has obviously been very much involved in it. So, I would say that what you are seeing is the combination of a gradual process, in which management duties have been shared and expanded.

Wes and I as I think has been obvious to most of you have been running this place as a team. So I wouldn’t think for the last two and a half months you are going to see a whole lot different. Obviously, with the future commitments we are talking about and some of the future issues Wes, what needs to take the lead there because he owns them, but the official change of command will be at the end of the year.

As far as the split Chairman CEO role, the board has always at Northrop reserved the right to make the decision that is appropriate for the company at the time. In this particular case, that it was the boards’ decision that the split role would probably be the right way to go and that will be the way we’ll go, until the board makes a decision to change that.

Joseph Nadol - JP Morgan

Okay, and then second question is for Jim, just on the cash flow. So just to be specific, I know you said that we are still on track. The guidance you had given before was $1.9 to $2.4 free cash flow before pension, that’s now 800, so am I correct in saying it’s after pension we are talking about $1.1 to $1.6?

Jim Palmer

Yes, some tax effects on that the benefit of the contributions, but yes.

Joseph Nadol - JP Morgan

Okay, and then on the working capital use this year, $400 million it looks like to date. Where do you anticipate finishing the year on that and how much of that is VITA for any other big specific pieces?

Jim Palmer

Almost as hard as projecting the supplier cost input at the end of the year is the cash collections. You might remember Joe at the beginning of the year, we talked about not having the working capital performance in 2009 that we had in 2008. I did expect that it would be negative. I still expect that it would be negative.

However, I am also mindful of our organizations zeal for going out and collecting cash at the end of the year. It is something as I think you know is part of our annual incentive, and so there is a clear incentive on the part of the management team to go get as much cash as we can and so at this point in time, the guidance is the best number I have.

As you said the $400 million down are working capital to-date. My guys, our guys are going to be really incentivized to bring that number down. I don’t think we’ll bring it totally down to zero.

Joseph Nadol - JP Morgan

Are you seeing Jim, any changes in the collectability of some of these things; is it getting tougher? It just seems like the working capital, maybe is going to the other direction for several companies and maybe it was last year, two years three years ago.

Jim Palmer

It is getting tougher Joe that the industry as a whole has had some issues with electronic billing and DCAA audit of electronic billing, which has resulted in some delays in collection. Obviously we still collect, it’s just how soon. The industry is dealing with that situation right now. It has been a drag this year on collections.

Joseph Nadol - JP Morgan

Okay. Going forward you don’t really have a sense as to whether that’s going to persist in the 2010 yet, it’s my guess?

Jim Palmer

Collectively the industry has an issue, there has been a change in approach by the DCAA on electronic billing and we are trying to resolve it, but it’s not resolved yet.

Joseph Nadol - JP Morgan

Okay. Thank you guys. Congrats again Ron.

Operator

And our next question will come from the line of Robert Stallard with Macquarie, please proceed.

Jim Palmer

Okay. Rob, this is supposed to be our last question.

Robert Stallard - Macquarie

No problem, I’ll just keep it quick. Jim on the ship building you had commented three months ago that you said there was a risk of further operating charges, they haven’t mentioned that today. Has this situation changed, do you think there is now a lower risk of having to take further cumulative cash term adjustments there?

Jim Palmer

Rob, I would say as Wes said, we are in the middle of this transitioning to the new way of managing the business, the metrics, we are in the midst of that. I don’t think I would say it’s any more or any less.

Robert Stallard - Macquarie

Okay. Best of luck for the future Ron.

Ron Sugar

All right.

Operator

Ladies and gentlemen, this concludes our question and answer portion for today. I would now like to turn the call back over to Mr. Wes Bush for any closing remarks.

Wes Bush

Thank you, Lacy. Before we wrap up the call I want to thank you all for joining us on Ron’s last conference call. I know I speak for everyone at Northrop Grumman, when I thank Ron for his leadership during an absolutely critical period of integration and growth for our company.

Now on a personal note, I am telling you it’s hard to express how much I’ve sincerely appreciated Ron’s trust and his guidance. I know that many of our employees are listening in on today’s call, and I certainly know I speak for all of them in wishing Ron the very best. So thank you Ron, and thanks everybody for joining our call today.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day everyone.

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